Article

SAP, Microsoft, and the Mendocino Factor

by Joshua Greenbaum

August 11, 2009

Sixty million customers are going to get lucky. By year-end, SAP and Microsoft will begin to release a Microsoft Office interface (code-named Mendocino) for mySAP Business Suite. Moreover, what we're seeing is the beginning of a trend to define more closely the role of the desktop in enterprise software.

It was an interesting coincidence that the latest sign of SAP's ongoing rapprochement with Microsoft took place in Copenhagen, that most mellow of European capitals. Copenhagen is, of course, the capital of Denmark, which has become something of a figure of speech for Microsoft CEO Steve Ballmer. In a keynote given to Microsoft partners last year at a Toronto conference, Ballmer declared that "my ambition is to make the whole world Danish." At Sapphire this year, Microsoft and SAP put a significantly different spin on Ballmer's words.

Ballmer's original reference was to the fact that Microsoft Business Solutions (MBS), still ailing after all these years and all those billions in investment, was a fabulous success in Denmark. It helps, of course, that two out of the four core enterprise software lines of MBS - Axapta and Navision - were originally developed and marketed in Denmark. And that this relative success takes place far from the battlegrounds of North America and Asia, where MBS is taking a beating against, among others, SAP.

The new spin on making the whole world Danish comes from the announcement at SAP's 2005 European Sapphire conference - held in Ballmer's new favorite country - that Microsoft and SAP will begin to release a Microsoft Office interface to SAP's mySAP Business Suite by year-end. Code-named Mendocino, that interface, really a seamless link between Office applications such as Outlook on the front end and SAP transaction systems on the back end, is what's going to make "going Danish" take on a whole new meaning at Microsoft.

A Most Powerful Partnership

First, let's not mince words about the significance of this agreement. This is a major, earth-shattering event in the enterprise software world. It brings together two software powerhouses and their 60 million joint customers - yes, 60 million - in a way that ought to scare the you-know-what out of their joint competitors, particularly Oracle. What it highlights is the indisputable fact that billions and billions of dollars are at stake - I've heard as much as $7 billion - in the relationship between SAP and Microsoft, and the two partners want to make sure that they leverage each other's strengths and keep the joint revenue throttle wide open.

What this agreement pretty much guarantees is that joint revenues are going to head up and out from here.

The idea that Outlook or Excel or Word can be a primary interface to SAP is hardly new. But the fact that the two companies developed and will now jointly market and sell the interface is pretty impressive. One of the top two reasons SAP implementations go south is a lack of training (the other is a poor implementation performed by an incompetent partner). With Office as a primary interface, using SAP becomes a whole lot more intuitive. This in turn will drive down training time and costs and help raise user satisfaction overall.

Of course, Microsoft has as much or more to gain by this agreement as well. One of the top two ways Microsoft loses customers is through Web browser, portal-driven interfaces to products such as those from SAP that don't require a single Microsoft product on the desktop. (The other is virus fatigue, which is spawning new legions of Macintosh users every day.) Keeping users in Office and still using SAP is a big win for Microsoft.

The agreement also gives Microsoft cachet in the enterprise software market that the several billion it has spent on its MBS group simply hasn't been able to generate. And Mendocino gives customers a good reason to stop and reconsider desktop Linux, Firefox, and other open-source alternatives that can't run Office and therefore can't provide this kind of seamless interface.

For SAP, the Microsoft agreement is also another inflection point in its partnership plans for its applications and the SAP NetWeaver platform. While Mendocino doesn't mean that Outlook is suddenly "powered by SAP NetWeaver," the deal shows how far SAP is willing to go in pursuing its platform ecosystem strategy, even if it means ceding key products (the portal) and real estate (the desktop) to a partner.

So much for the winners. Who are the losers?

While much of this agreement is clearly aimed at Oracle, the big loser could end up being MBS. It was hard not to notice that the guy on stage with SAP's Henning Kagermann in Copenhagen was Jeff Raikes, the Microsoft group vice president for Microsoft's Information Worker group. This is a business unit that weighs in at 15 times the revenues of MBS, and with MBS turning in another unimpressive quarter recently, it's increasingly clear that the enterprise software revenue Microsoft can earn with SAP is an order of magnitude more important than what it can earn from its own enterprise software unit.

As for Oracle, when Mendocino was announced at the end of April, it was the latest in an ongoing series of moves on the part of SAP to isolate Oracle and further SAP's market dominance. Still smarting at the time from having Retek snatched out from under it by Larry Ellison's hyper-aggressive acquisition style, SAP was eager to further its growing partnership plans in order to increase the value of SAP and its ecosystem at the expense of Oracle.

The Role of the Desktop

In the final analysis, what we're seeing is the beginning of a trend to define more closely the role of the desktop in enterprise software. SAP is definitely not willing to cede the entire desktop to Microsoft - too much of SAP's plans for SAP NetWeaver and its enterprise services architecture depend on some measure of command and control over the desktop. But SAP is willing to let partners such as Microsoft solidify their position on the desktop, as long as it unequivocally helps SAP solidify its position elsewhere.

So next time you hear Steve Ballmer talk about "going Danish," bear in mind that he and Microsoft are "going SAP" in a much bigger way. Mendocino is as much a product as it is a statement of a shared future for SAP and Microsoft that hasn't been easy to articulate. Until now.

Joshua Greenbaum is a market research analyst and consultant specializing in the intersection of enterprise applications and e-business. Greenbaum has more than 15 years of experience in the industry as a computer programmer, systems analyst, author, and consultant. Before starting his own firm, Enterprise Applications Consulting (www.eaconsult.com), he was the founding director of the Packaged Software Strategies Service for Hurwitz Group.

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